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The world of investing can be a noisy one. Market fluctuations, new technologies, global pandemics — it’s easy to get caught up in the sentiment swings of online investing, and the social media rabbit holes that accompany them. 

Here at Chip, we believe that amongst all the chaos there are a set of principles that every investor can use to give themselves the best chance of success. 

These principles aren’t cheat codes to making big gains overnight, but we should all be considering the following as part of a sustainable path to a richer life. 

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than your original investment. Chip does not offer financial advice and this should not be considered as a personal recommendation.

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Understand your tolerance to risk

Attitude to risk in investing refers to how much uncertainty and potential losses an investor is willing to accept in pursuit of their financial goals. In terms of understanding your personal tolerance to risk, this can be influenced by a multitude of factors. 

Your personal risk tolerance refers to how much risk you are willing to take on, and this varies based on your personal circumstances

If you have a high tolerance to risk, you’re generally willing to take on potentially more volatile investments, in pursuit of potentially higher returns.

Investors with a moderate risk tolerance, are generally willing to take on some risk, but prefer to combine this with stability.

A low tolerance to risk is often associated with a desire to preserve cash, and a pursuit of steady long-term gains. 

Your financial risk capacity can be dependent on your income, savings, and other financial obligations. For example, you may have a high personal tolerance to risk, but may have to scale this against how much you can afford to invest. 

Once you’ve determined your risk tolerance, you can begin to create an investment strategy that reflects this. The investment funds that Chip offers are rated on a risk and reward scale from 1 to 7, to help you visualise where a funds strategy aligns with your own.   

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Invest early – and often 

Starting your investment journey as early as you can, is a great strategy to building long-term wealth. Investing smaller amounts over a longer period is generally regarded as a better option than depositing large amounts of saved cash later on.

This is due to the power of compound interest. In investing, this is the gains earned on your gains, and has a greater impact over a longer period — check out our full blog here. 

Investing regularly is a great way to ensure you’re tracking the amount you’re putting away each month, as well as avoiding entering the market at specific times with a lump sum.

This is known as ‘pound cost averaging’. This is a great way to curb the effects of market volatility, as your investments enter the market at varying price points.

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Stick to the plan to realise your goals

When the market is experiencing volatility, it’s easy to become fixated on immediate movements. Dramatic changes in price can influence investor behaviour everywhere — it’s a natural reaction.

However, it’s important to stay focussed on your long-term goals when investing, and not get caught up in changes in investing sentiment. 

By looking at investing as a long-term commitment, you can account for market volatility as part of your investing journey. These events may not significantly derail your investing plan long-term, as historically markets have recovered well.

Diversify your portfolio

Diversification, in investing terms, refers to the practice of spreading your money across different asset classes (shares, bonds), companies, regions and sectors. In doing so, you reduce the significance of any particular market downturn. 

For example, if I invested solely in Asian markets, and a financial crash hit India and Japan, it’s likely I would leave my whole portfolio open to the volatility that came with this type of event.

However, if my investment in the Asian market was part of a diverse portfolio spread across global markets and sectors, in a mix of shares, bonds, and commodities; my exposure to this volatility would be lessened. 

Diversification doesn’t just protect you from market downturns, it also allows you to tap into market opportunities. These opportunities for growth can provide an additional cushion to market downturns, and help get you on your way to achieving those long-term financial goals.

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Review and rebalance

Avoiding reactionary responses to market movements is important, but that isn’t to say that you should avoid redistributing your investments if you notice certain long-term trends or opportunities. 

It’s important to regularly review your investments to ensure they are aligned with your goals and risk profile. 

When market values rise and fall in your portfolio, the distribution weighting of your assets can divert from your investment plan. These movements may leave you exposed to a level of risk you aren’t comfortable with.

Reviewing these changes, and buying and selling your assets in line with your goals is called ‘rebalancing’ in investing terms. 

It’s important to check in with your portfolio every six months to a year. However, if you prefer to take a more hands off approach, take a look at our ‘actively managed’ offerings.

Fund managers aim to regularly rebalance these portfolios, to adapt to market conditions, and maintain the desired asset allocation for each fund. 

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Consider your costs 

The costs of your investment portfolio might not feel like a priority to consider when considering your broader financial goals. The management cost of funds can vary between funds, with fees for actively managed funds often higher than passive funds. 

Here at Chip, we offer a low platform fee of 0.25%. You can enjoy 0% platform fees with a ChipX subscription, at a fixed monthly cost, so you know your platform fees are taken care of.* 

You’ll also want to consider the potential taxes on your investment gains, if investing through a General Investment Account (GIA).

Make sure to review your tax allowances for each tax year, as you may be liable to pay Capital Gains Tax (CGT) on any gains, as well as tax on any dividends paid out on income funds. Investing via a Stocks & Shares ISA will always protect you from this. 

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Chip does not provide tax advice. Tax treatment depends on individual circumstances and may be subject to change in the future.

Seccl Custody Limited is the ISA Manager for the Chip Stocks and Shares ISA. A monthly or annual ChipX membership required for certain funds selected within a Stocks and Shares ISA. Fund management charges apply ISA limits apply.Invest £20k per tax year. Chip does not provide tax or financial advice. Tax treatment depends on individual circumstances and may be subject to change in the future.

Currency Risk: The value of investments that are not in pound sterling may be affected by changes in exchange rates.

*A monthly or annual ChipX membership fee is required and fund management charges apply.